Cleaning Up Taxpayer's Past Misdeeds

Transcription

1 Cleaning Up Taxpayer's Past Misdeeds Presented By: Joel N. Crouch, J.D. 901 Main Street, Suite 3700 Dallas, TX fax Fort Worth Tax Institute August 3, 2017 Copyright All rights reserved.

2 Joel N. Crouch Managing Partner Joel Crouch is Managing Partner of Meadows, Collier, Reed, Cousins, Crouch & Ungerman, L.L.P. He represents a broad range of clients, including individual taxpayers, closely-held business enterprises, estates, corporations and tax advisors in all stages of federal civil and criminal tax proceedings. In almost 30 years of practice, he has helped his clients resolve hundreds of civil and criminal tax matters, many of which involved sophisticated and complex legal and tax issues, both domestic and international. phone (214) phone (214) toll-free (800) fax (214) jcrouch@meadowscollier.com (800) fax (phone (214) toll-free (800) fax (214) jcrouch@meadowscollier.com 214) jcrouch@meadowscollier.com Joel is board certified in tax law by the Texas Board of Legal Specialization and has been recognized as one of the best in his field by Texas Monthly and Law and Politics Magazines by being named a Texas Super Lawyer from 2003 through He has also been named one of the Best Lawyers in Dallas by D Magazine for the year and he has also been named to Best Lawyers in America for Tax Law. Joel was recognized as a Top Rated Lawyer in White Collar Criminal Defense Law by ALM as published in The American Lawyer, Corporate Counsel and The National Law Journal. He is a frequent speaker on both substantive and procedural tax issues for both legal and accounting professionals. Topics include Tax Shelter Defense, IRS Examinations, Appeals, Litigation and Collection Strategies, IRS Criminal Investigations, IRS Offshore Activities, IRS Focus on Tax Professionals, Employment Classification, IRS penalties, and Litigating Partnership Tax Cases. Joel has published various articles regarding the IRS & tax procedures. Meadows, Collier, Reed, Cousins, Crouch & Ungerman, 2L.L.P. 2

3 So what happened? Whether due to greed or stupidity, clients can commit all sorts of civil and/or criminal tax offenses. The issue for practitioners is what to do about poor choices made by the client. Conducting your due diligence. Taxpayer may come to you with one issue, but what other issues are lurking beneath the surface? Foreign and/or domestic Employments taxes Sales and/or Franchise Tax issues 3

4 Enforcement Issues IRS enforcement issues may impact your strategy. According to the IRS Data Book, there are 17% fewer employees since Half of these reductions are in enforcement. There have also been 20% fewer criminal cases since Staffing levels for special agents and professional staff have decreased over the last five years ( ) by 19.1% and 21.7% respectively. IRS CI Annual Report 4

5 Enforcement Issues DOJ Tax and IRS have publicly announced what issues are considered top priorities. One issue that is regularly mentioned is employment taxes. Why do we care about these public announcements? The government is essentially telling us where they are focused and how they are spending resources. If you have a client in one of these categories, one might consider more formal protections when fixing prior noncompliance issues. 5

6 Enforcement Issues The Washington Post listed six reasons why tax cheating is about to rise in the U.S. Congress has gutted IRS enforcement Budget cuts have hurt IRS customer service Growing perception that everyone else is doing it Declining trust in government The tax code gets more complicated every year The rise of the gig economy cheating-is-going-to-get-worse/2016/08/29/e66291e6-6e24-11e e51a2f424d_story.html?utm_term=.cdfee What does the general public take away from articles like these? More and more everyday taxpayers are willing to push the rules to their limits (or over the limit) and it will be left to tax professionals to fix their prior misdeeds when the taxpayer realizes the error in his or her ways. 6

7 How the Past Comes Up? Is it simply because the client can t sleep at night? Will correcting the problem have other potentially adverse consequences? Selling business Divorce DOL audit based on employee tip TWC Audit Civil lawsuit IRS/state taxation audit Other indicted criminal investigation 7

8 Considerations what type of tax? Income tax personal Joint return issues? Innocent spouse arguments? Income tax business Who or what is the client? 941 tax Who are the responsible persons? Are all of the potential responsible persons adequately represented? Form 4180 issues? Other types of taxes 8

9 General Options/Issues to Consider Correcting the problems prospectively only Quiet voluntary disclosures IRM (6)(1) Qualified Amended Return? Formal voluntary disclosures Domestic International Worker classification issues Section 530 Relief Classification Settlement Program Voluntary Classification Settlement Program State tax issues and disclosure issues Criminal exposure: Federal and/or State? 9

10 Due Diligence What questions should we be asking to determine how best to correct the situation? What did the client do (or not do)? Altered books or a second set of books? Miscoded bookkeeping entries? How material is the issue? 10

11 Due Diligence Was it willful? Intentional violation of a known legal duty Has the IRS or another agency contacted the client? Where is the issue? 11

12 How likely is it to be discovered? Oftentimes taxpayers will want to do the minimal amount to correct an issue, but before deciding how many years to correct or how to correct it, one must consider the likelihood of discovery. Whistleblowers Generally, 26 U.S.C provides potentially handsome financial awards between 15% - 30% for information that leads to the collection of taxes. In 2013, $53M in awards were paid out and led to the collection of $367M in taxes, penalties and interest. In 2014, $52M in awards were paid out and led to the collection of $309M in taxes, penalties and interest. Angry ex-spouses, disgruntled business partners or employees? 12

13 Worker Classification Issues Classification of employees as independent contractors Review the factors for classification under Rev. Rul Instructions 2. Training 3. Integration 4. Services rendered personally 5. Hiring, supervision, and paying assistants 13

14 Worker Classification Issues: If Under Audit If the taxpayer is under audit: Section 530 Relief: (1) Reasonable basis for not treating workers as employees? (2) Substantial consistency (3) Reporting consistency - Filed 1099s Classification Settlement Program (CSP) (1) IRM (2) 100% CSP Offer (3) 25% CSP Offer 14

15 If Not Under Audit: IRS Voluntary Classification Settlement Program (VCSP) The VCSP is available for taxpayers who want to voluntarily change the prospective classification of their workers. Consistent treatment. Filed all Forms 1099 for the past 3 years. Not currently in employment tax audit with IRS per audit by Department of Labor or State government agency. 15

16 Additional Considerations What are the issues? Unreported income (taking cash payments) Form 8300 issues? Where did the cash go? Currency Transaction Report (CTR) issues Can you correct or remedy CTR violations? Civil and criminal penalties related to CTR violations that often accompany tax cases. Paying employees cash under the table Where is the cash coming from to pay the workers? Uber case examples: O Connor v. Uber Berwick v. Uber 16

17 Assume the Taxpayer Has Not Been Contacted by the Government What are the options? Do nothing. Must be compliant moving forward Is it possible to file correct current returns that will not conflict with incorrect prior returns? Inventory issues? Amend Returns/File returns (Quiet disclosure) IRM (6)(1) How many years will you complete? Potentially gives no criminal protection. May limit years and penalties at issue. Will this trigger a review of other years? Formal Domestic Voluntary Disclosure IRM

18 Formal Voluntary Disclosure IRS Voluntary Disclosure Legal source, timely, and cooperate in the determination of the tax and make a good faith arrangement to pay. IRM What is timely? A disclosure is timely if it is received before: The IRS has initiated a civil examination or criminal investigation of the taxpayer, or has notified the taxpayer that it intends to commence such an examination or investigation. PRACTICE ALERT: A disclosure made after receiving an IRS notice stating the IRS has no record of a return can still be timely. IRM (6)(4). The IRS has received information from a third party (e.g., informant, other governmental agency, or the media) alerting the IRS to the specific taxpayer s noncompliance. The IRS has initiated a civil examination or criminal investigation which is directly related to the specific liability of the taxpayer. The IRS has acquired information directly related to the specific liability of the taxpayer from a criminal enforcement action (e.g., search warrant, grand jury subpoena). 18

19 Formal Voluntary Disclosure How to make a domestic voluntary disclosure: Pre-clearance: Taxpayers or taxpayer representatives wishing to make a domestic voluntary disclosure may fax the taxpayer s name, date of birth, social security number, and address to the IRS Criminal Investigation, Attn: Domestic Voluntary Disclosure Coordinator at (267) or mail the information to the following address: (An executed power of attorney, Form 2848, must be included if the taxpayer is represented by a tax professional). Preliminary Acceptance: After the IRS confirms (or pre-clears) that the taxpayer appears to be timely, the taxpayer will be required to then complete a domestic voluntary disclosure letter, which requires more detail of the substantive facts. The IRS may then preliminarily accept the taxpayer into the disclosure program. At that point, the taxpayer will be required to file the correct returns and make good faith arrangements to pay. If a taxpayer or representative has questions regarding the voluntary disclosure program, they may contact the IRS Criminal Investigations Voluntary Disclosure hotline (which is for both Offshore and Domestic disclosures) at (267)

20 Formal Voluntary Disclosure When determining how many years to correct in a multi year problem, one should consider that there is a six (6) year criminal statute of limitations for tax offenses and there is no civil statute of limitations for fraud or failure to file. Although a formal voluntary disclosure does not provide for statutory criminal protections, it provides administrative protections that indicate a taxpayer who successfully completes a VD will not be prosecuted. If a taxpayer cannot fully pay, the VD program only requires a good faith effort to make arrangements to pay. If a taxpayer cannot pay, he may consider an OIC even though he is completing a voluntary disclosure. 20

21 OICs & Unfiled Returns Assume a client has 10 or more years of unfiled returns, most voluntary disclosure participants will only file the last six years to give them criminal protections. If the client cannot make full payment for the six years, he might consider an OIC. Section 7 of the OIC requires a certification attesting that all required tax returns have been filed. If the taxpayer has only completed six years as part of the VD process, can he certify that all required returns have been filed? IRM states that an OIC will only cover six years unless a manager approves otherwise. How do we answer Section 7 of the OIC? 21

22 State Issues Using Texas as an example, each practitioner should consider the consequences that a federal issue may have on the taxpayer s state and local returns. TX Voluntary Disclosure Agreement, Tax Pub Even if under IRS audit, you may be able to complete a state VDA for sales tax, so long as the Texas comptroller has not already contacted the taxpayer. However, if under IRS audit, you may not be able to formally complete a VDA for franchise taxes. If the business has collected sales taxes, but failed to remit them, the taxpayer will have to go back to the beginning of the failure to pay period to avoid penalties and complete a VDA. On the other hand, if the business simply failed to collect, the taxpayer will only go back 4 years to complete a VDA and avoid penalties. 10% delinquency penalty 50% fraud penalty State criminal offenses? Failure to pay taxes collected. Tex. Tax Code (4 year SOL) Misapplication of fiduciary property. Tex. Penal Code (7 year SOL) 22

23 The Benefits of Not Being Contacted by the Government The taxpayer will have more options. The taxpayer may get a better deal by correcting himself before contact. The potential to avoid criminal prosecution. The potential to limit the scope of the years at issue. Potential Negatives of Correcting the Prior Mistakes? Paying the bill. Even if a taxpayer utilizes the formal voluntary disclosure process, he may be subjected to civil penalties and interest. Collateral impact to other taxpayers may have far reaching consequences. What if two business partners each had tax liabilities and only one self-reports? 23

24 Assume the IRS has Contacted the Taxpayer Potentially no formal voluntary disclosure option. Conflict between being honest and open versus making criminal admissions or admissions that will result in a fraud finding. Were there any prior misstatements or erroneous documents provided to the auditor by the taxpayer before your representation? Circular 230, 10.22, Who is the client? Innocent spouse issues often come up in unreported income cases and require separate representation. Circular 230, Can you get a revenue agent report without getting a criminal referral? 24

25 IRS Has Contacted Taxpayer First Is it an eggshell audit? Are there sensitive issues that we know will have to be addressed? What is the best way to address those issues with the agent? Is the IRS Special Enforcement Program (SEP) handling the audit? See IRM SEP Agents specialize in fraud cases. They work closely with IRS-CI. If SEP is on the case, the agent likely believes there is a significant issue on day one. In Dallas, SEP agents are also handling foreign account/entity audits of people who did not come forward under OVDP or streamlined disclosures. Are we going to allow the taxpayer to interview with the IRS? CSP (if its worker classification) If the taxpayer has been contacted by the government and we know there is classification issue, consider Section 530 relief and classification settlement program option. 25

26 Foreign Account and/or Foreign Entity Issues Forms to Consider When Determining Past Reporting Compliance for Foreign Assets FinCEN Form 114, Report of Foreign Bank and Financial Accounts ( FBAR ) Form 8938, Statement of Specified Foreign Financial Assets Form 3520, Annual Return to Report Transactions with Foreign Trusts and Receipt of Certain Foreign Gifts Form 3520-A, Information Return of Foreign Trust with a U.S. Owner Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund Form 8865, Return of U.S. Persons with Respect to Certain Foreign Partnerships Form 8858, Information Return of U.S. Persons with Respect to Foreign Disregarded Entities 26

27 Foreign Account and/or Foreign Entity Non-Compliance Issues Offshore Voluntary Disclosure Program Eight (8) year voluntary disclosure period Pay back taxes, accuracy related penalty or delinquency penalties, and miscellaneous offshore penalty (MOP). MOP is generally 27.5% or 50% if you bank is on the naughty list. Streamlined Filing Compliance Procedures More than 30k submissions since 2012 Certify that conduct was non-willful U.S. Taxpayers Residing in the U.S. See Form % MOP U.S. Persons Residing Outside of the U.S. See Form

28 Delinquent FBAR Submission Procedures Delinquent FBAR Submission Procedures No penalty for the failure to file FBARs if: You properly reported on your U.S. tax returns, and paid all tax on, the income from the foreign financial accounts reported on the delinquent FBARs, and you have not previously been contacted regarding an income tax examination or a request for delinquent returns for the years for which the delinquent FBARs are submitted. FBARs will not be automatically subject to audit but may be selected for audit through the existing audit selection processes that are in place for any tax or information returns. 28

29 Delinquent International Information Return Submission Procedures Taxpayers who: have not filed one or more required international information returns, have reasonable cause for not timely filing the information returns, are not under a civil examination or a criminal investigation by the IRS, and have not already been contacted by the IRS about the delinquent information returns. Reasonable Cause Statement Attached to amended tax returns 29

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